The Abyss of Rigour, in Brazil: When Financial Engineering Ignores the Physics of the Grid

Summary

The planning of critical infrastructure demands an unshakeable structural match between the physics of grids and the State’s contracting architecture. This article dissects the recent award of Brazil’s 2nd and 3rd Capacity Reserve Auctions (LRCAP), which committed the equivalent of 93.7 billion euros (R$ 515.7 billion) over a 15-year horizon. It shows how contracting 18.97 GW of baseload thermal plants to mitigate an eminently transient operating constraint (only 120 hours a year) is a serious systemic fracture. It highlights the regulatory asymmetry that keeps fast-response technologies, such as Battery Energy Storage Systems (BESS), hostage to regulatory delays. It concludes with a warning about the impact of this financial capture on economic competitiveness, on technological sovereignty and, ultimately, on the cohesion of the social fabric.

Introduction

The discipline of integrating complex systems dictates an unavoidable premise: financial engineering must never take precedence over the fundamental laws that govern the nature and physics of infrastructure. When public policy-making is divorced from physical, operational and thermodynamic realities, strategic planning inevitably plunges into the abyss of rigour — a structural void where vital resources are consumed by solutions incapable of solving problems at their root.

We are currently witnessing a paradigmatic example of this systemic failure in the South American electricity sector, namely in Brazil. The operating challenge of the Brazilian grid is surgical and measurable: the system lacks flexibility and the capacity to shift energy in time to meet very specific demand peaks. We are talking about a constraint of only 120 hours a year (about 1.37% of the year), which requires power injections on the order of milliseconds. From a strictly engineering point of view, the answer calls for agile storage technologies, such as batteries (BESS).

Yet the solution awarded by Brazil’s regulatory bodies is a monumental technological mismatch: the contracting of long-term thermal plants, locking the State and taxpayers into a charge of more than 7 billion euros a year for a decade and a half.

This is not a mere dispute about types of generation; it is, fundamentally, a question of verticality. Optimising grids, safeguarding systemic stability and promoting the energy transition are missions that must serve human cohesion. When regulatory decisions distort mathematical logic to protect the interests of an obsolete financial model — allowing unjustifiable rates of return to “paper generators” —, it is the resilience of populations that collapses. It is therefore important to audit the anatomy of these choices rigorously, restoring the necessary bridge between scientific truth and the integrity of public decision-making.

1. The Background in Brazil: The Physics of the Problem vs. Regulatory Inertia

At the origin of this situation lies a very precise operational and thermodynamic need of Brazil’s National Interconnected System (SIN). The system faces a power deficit confined to a window of 120 hours a year (only 1.37% of the time in a year), corresponding to the daily transition when solar generation falls abruptly while household consumption and street lighting surge.

Communications and energy engineering dictates that, to perform this short time shift and manage steep load ramps, the system requires fast-response technologies (in milliseconds), namely Battery Energy Storage Systems (BESS) or smart demand aggregation.

The Brazilian State recognised this technical reality: at the end of 2025 the Ministry of Mines and Energy (MME) began preparations for a dedicated storage auction. However, a critical time asymmetry set in: the regulatory framework for batteries was deliberately left to stagnate, keeping innovation on hold, while licensing for the technologies of the past was accelerated.

2. The Current Overall Situation: The Plunge into the “Abyss of Rigour”

The present picture amounts to a serious structural dysfunction, in which decision-making has been completely divorced from physical and operational realities — a classic case of the abyss of rigour.

To solve a transient event (short peaks), the Brazilian State awarded 18.97 GW of baseload capacity (natural-gas thermal plants), committing the social fabric to a charge of 93.7 billion euros, that is R$ 515.7 billion, over 15 years. The wrong technology was bought for the right problem.

This financial commitment, equivalent to more than the country’s annual health budget, not only locks up the economic capacity of the electricity system, but closes the window of opportunity for the country’s energy transition and digital sovereignty. The market was distorted to guarantee internal rates of return (IRR) of around 96% to companies whose origin is not infrastructure engineering but financial engineering (“paper generators”). The result is an inefficient infrastructure that will raise the cost of living for the population and undermine the competitiveness of industry, compromising social cohesion.

3. The Diagnosis: The Abyss of Rigour

What is described here is a case in which political and financial decision-making was ostensibly dissociated from the physical and thermodynamic reality of the power grid. We are facing what can be classified as the abyss of rigour.

Engineering dictates that the problem to be solved is surgical and transient: the need for operational flexibility and time-shifting of energy for a peak of 120 hours a year (1.37% of the year). Yet the solution awarded was structural and baseload: thermal plants on 15-year contracts, designed for prolonged contingencies and not for millisecond injections.

Brazil did not contract electrons or grid stability; it contracted a financial capacity charge, fixing the architecture of the system in the past and ignoring the fit between technology and the real load profile.

4. The Trap of Interests: The Capture of Regulatory Time

The real trap lies not only in the choice of technology, but in the legal and temporal architecture that allowed it. The reader should be alerted to the following systemic dysfunctions:

• Rent-seeking and “paper generators”: the primary aim of the auction winners is not to deliver energy efficiency or synchronous inertia, but to capture a shielded financial product (a contract with the Brazilian State with an unrealistic internal rate of return of 96%).
• Regulatory delay as a tactical barrier: the fact that the thermal auction was approved in 60 hours, while battery (BESS) regulation has dragged on for more than a year, is not bureaucratic inefficiency. It is a deliberate strategy. The regulatory delay acts as a protective shield for legacy thermal assets, closing the market space to technological disruption before it can even compete.
• The financial lock-in effect: by committing more than R$ 515 billion over the next 15 years, the budget (CDE, the Energy Development Account) and the capacity of the grid are exhausted. When the right technology (BESS storage) is finally regulated, there will no longer be financial or operational “room” to integrate it efficiently.

5. Proposal for Action: An Invitation to Holistic Thinking

To prompt a systemic and constructive reading, my proposal for reflection is that the reader should demand unshakeable verticality in public procurement. The argument should focus on the following vectors:

• Audit the intention vs. the physics: I challenge the reader to stop debating “gas vs. batteries” in isolation, and to demand instead that every public tender demonstrate, mathematically, the match between the topology of the grid, the real load curve and the technology chosen.
• Claim technical sovereignty: State planning cannot be hostage to lobbying for unsuitable technologies. The reader (and the sector) should demand that long-term investment decisions be preceded by public, transparent and scrutinisable dynamic grid simulations, preventing purely financial extrapolations.
• Map the architecture of the decision: urge decision-makers and engineers to concentrate on the drafting of the terms of reference. That is where the problem must be isolated. If the specification stipulates that the solution must respond to peaks within milliseconds at zero marginal cost, the market itself will filter out unsuitable solutions.

6. Timeline: Who Decided What

The anatomy of this capture of the Brazilian electricity system can be mapped through the following chronology of decisions and omissions:

• October to December 2025
  Who: Ministry of Mines and Energy (MME).
  What: launches and closes Public Consultation 202/2025 to design the Battery Auction. It lays the theoretical foundation but fails to publish the executive ordinance, stalling the integration of 18 GW of BESS projects already mapped by the industry.
• 18 and 20 March 2026
  Who: ANEEL (National Electric Energy Agency), MME and CCEE (Electric Energy Trading Chamber).
  What: within a narrow window of 60 hours, they hold the 2nd and 3rd Capacity Reserve Auctions (LRCAP). They award 18.97 GW of thermal plants with a merely residual discount (5.52%), shielding 15-year contracts that ignore the load profile the grid requires.
• 15 April 2026
  Who: Federal Court of Accounts (TCU) — through Minister Bruno Dantas.
  What: the State’s supreme auditor publicly identifies the systemic anomaly. He coined the term “paper generators”, denouncing the fraud model in which entities win auctions at the ceiling price only to resell the licences, with neither the intention nor the physical capacity to deliver real infrastructure.
• 6 May 2026
  Who: Chamber of Deputies — through Deputy Danilo Forte (rapporteur of PDL 264/2026).
  What: proposes the full suspension of the auction by legislative means. He exposes the financial disparity (96% IRR against a benchmark of 9.2%) and calls in CADE (the Administrative Council for Economic Defence) to investigate a possible cartel.
• 12 May 2026 (date of the source report)
  Who: MME.
  What: regulatory inertia continues. The final ordinance for the battery auction (the right technology) remains unpublished, while the deadline for approving the thermal plants (the technology awarded) moves inexorably forward.
• The critical horizon — 21 May 2026
  Who: TCU (Federal Court of Accounts) plenary.
  What: the decisive session. The Court will decide whether to approve the results, require structural adjustments or suspend the process. This decision will determine whether Brazil perpetuates this dysfunctional model, borne by taxpayers, or restores verticality and technical rationality to its vital infrastructure.

7. Financial Correspondence (Brazilian Real to Euro)

In infrastructure analysis, the size of the capital tied up must be understood at its true macroeconomic scale. For this conversion, a conservative reference exchange rate of 1 EUR ≈ 5.50 BRL is adopted.

• Overall financial commitment (15 years): original value R$ 515.7 billion; in euros, ≈ €93.7 billion. Analytical note: this figure approaches the entire annual gross domestic product (GDP) of several medium-sized European nations, underlining the seriousness of the financial lock-in to an unsuitable technology.
• Annual financial charge: original value R$ 38.9 billion; in euros, ≈ €7.07 billion a year.
• Estimated saving from adopting BESS (per GW): original value R$ 4.6 billion; in euros, ≈ €836 million saved for each gigawatt installed compared with a thermal plant.

8. Traceability of the Evidence and Proof Links

From a perspective of verticality and rigorous auditing, validation is not done with press clippings, but by scrutinising primary documents on institutional portals. Given the timeframe of the decisions (March to May 2026), the evidence should be drawn directly from the following Brazilian State databases:

Evidence 1: The proceedings at the Federal Court of Accounts (TCU)

• What to audit: the plenary session of 15 April 2026, Minister Bruno Dantas’s statement on the “paper generators” and the approval agenda for 21 May 2026.
• Proof link: TCU case-law and agenda search portal
• URL: https://pesquisa.apps.tcu.gov.br/
• Procedure: search for “Leilão de Reserva de Capacidade 2026” or “LRCAP” in the plenary minutes.

Evidence 2: The legislative intervention (Chamber of Deputies)

• What to audit: Draft Legislative Decree (PDL) 264/2026 and the report by Deputy Danilo Forte, which exposes the 96% internal rate of return (IRR) and proposes CADE’s intervention.
• Proof link: Chamber of Deputies legislative search portal
• URL: https://www.camara.leg.br/busca-portal
• Procedure: enter “PDL 264/2026” to access the original document, the mathematical annexes and the progress of the suspension proposal.

Evidence 3: The official auction results (ANEEL / CCEE)

• What to audit: the raw award data for the 18.97 GW, the winners of the 2nd and 3rd LRCAP and the average discount of 5.52%.
• Proof links: Electric Energy Trading Chamber (CCEE): https://www.ccee.org.br/mercado/leiloes; National Electric Energy Agency (ANEEL): https://www.gov.br/aneel/pt-br.
• Procedure: consult the history of auctions for March 2026.

Evidence 4: The comparative technical report (Aurora Energy Research / ABSAE)

• What to audit: the thermodynamic model and the levelised cost (System LCOE) proving the saving generated by storage systems (BESS) compared with gas-fired thermal plants over the 15-year horizon.
• Proof link: official repository of ABSAE (the Brazilian Association of Energy Storage Solutions)
• URL: https://www.absae.org.br/
• Procedure: look for the “Estudos e Publicações” (studies and publications) section for 2025/2026.

Evidence 5: The source of the original article

• What to audit: the “Energy Week” newsletter by Luiz Claudio Mandarino Freire, dated 12 May 2026.
• Proof link: professional profile and newsletter repository.
• URL: https://www.linkedin.com/in/luizmandarino/

References and Documentary Traceability

The technical validation of this article rests on rigorous scrutiny of primary sources and on conservative macroeconomic parameters (exchange rate adopted: 1 EUR ≈ 5.50 BRL).

• Agência Nacional de Energia Elétrica (ANEEL) & Câmara de Comercialização de Energia Elétrica (CCEE). (2026). Resultados Oficiais do 2º e 3º Leilão de Reserva de Capacidade na forma de Potência (LRCAP) (official results of the 2nd and 3rd capacity reserve auctions). Documentation on the award of 18.97 GW and the 5.52% discount. Available on the institutional portals of ANEEL and CCEE (March 2026).
• Aurora Energy Research. (2025). Relatório Técnico-Financeiro sobre Análise Comparativa de Ciclo de Vida: BESS vs. Térmicas a Gás no Sistema Interligado Nacional (technical and financial report on a comparative life-cycle analysis: BESS vs. gas-fired plants in the SIN). A study quantifying a saving of about €836 million (R$ 4.6 billion) per GW in favour of BESS. Commissioned by ABSAE. Available at: https://www.absae.org.br/
• Câmara dos Deputados do Brasil. (2026). Projeto de Decreto Legislativo (PDL) 264/2026. Report by Deputy Danilo Forte, identifying the 96% IRR and requesting CADE’s intervention. Search via the legislative portal. Available at: https://www.camara.leg.br/busca-portal
• Empresa de Pesquisa Energética (EPE). (2025/2026). Diagnóstico Técnico Sistémico das Restrições Operativas do Sistema Interligado Nacional (systemic technical diagnosis of the SIN’s operating constraints). Identification of the surgical 120-hour-a-year deficit. Rio de Janeiro, Brazil. Available at: https://www.epe.gov.br/
• Freire, L. C. M. (2026, 12 May). O Brasil contratou térmica para um problema de bateria. Em 9 dias, o TCU decide o que fazer com R$ 515 bilhões (Brazil contracted thermal power for a battery problem; in 9 days the TCU decides what to do with R$ 515 billion). Energy Week. Temporal analytical basis. Available in the author’s repository: https://www.linkedin.com/in/luizmandarino/
• Tribunal de Contas da União (TCU). (2026, 15 April). Minutes and statements of the plenary session on the LRCAP approval process. Record of Minister Bruno Dantas’s warning about the risk of “paper generators”. Search via TCU case-law search. Available at: https://pesquisa.apps.tcu.gov.br/

Reflection

As engineering and strategic planning professionals, we cannot ignore the premise that the effectiveness of the grid is dictated by physics, not by lobbying. I ask my network: what technical safeguard mechanisms should we demand in the drafting of government specifications to prevent this kind of asymmetry from compromising our energy future? Leave your technical view in the comments.

Methodological note

What this page is. An English translation of the article the author published on LinkedIn on 13 May 2026; the full Portuguese version is on this site. The facts, dates and amounts concerning the Brazilian auctions are those stated by the author, who took them from Luiz Claudio Mandarino Freire’s newsletter of 12 May 2026 and from the portals indicated; this page does not verify them and does not follow the case after the date of the article. The conversions to euros use the author’s rate (1 EUR ≈ 5.50 BRL) and have been checked: 515.7 ÷ 5.5 ≈ 93.8 (the original gives 93.7); 38.9 ÷ 5.5 ≈ 7.07; 4.6 ÷ 5.5 ≈ 0.836; and 120 h ÷ 8,760 h ≈ 1.37%. The original does not explain how the annual charge (R$ 38.9 billion) relates to the 15-year total (R$ 515.7 billion): fifteen times 38.9 is 583.5.

Changes of form, not substance. The original has two sections numbered 7; the second is numbered 8 here. The tracking parameters have been removed from the link to Freire’s profile. “Mil milhões” (Portuguese) and “bilhões” (Brazilian) are both rendered as “billion”. Brazilian institutions: MME, Ministry of Mines and Energy; ANEEL, the electricity regulator; CCEE, the electricity trading chamber; TCU, the Federal Court of Accounts; CADE, the competition authority; EPE, the energy research company; SIN, the National Interconnected System; CDE, the Energy Development Account.

Gaspar do Amaral · Original in Portuguese of 13 May 2026, published on this site; translation issued on 30 October 2026 · Figures and tables © Aprecisa.com · AI-assisted

How to cite: Gaspar do Amaral (2026). O Abismo do Rigor, no Brasil: Quando a Engenharia Financeira ignora a Física da Rede. Zenodo. https://doi.org/10.5281/zenodo.23814384 · Permanent archive on Zenodo.